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Friday, March 30, 2007

Trade, Safe-Haven Issues Drive Gold Higher

The Associated Press reports on the US dollar. "The dollar ended the week with an ugly sell-off, triggered largely by news the United States will no longer exempt Chinese companies from U.S. anti-subsidy laws, which offset a slew of largely dollar-positive data. While the greenback was able to retrace some of its losses against the yen in particular, it ended the New York session down across the board."

"'Hope that the dollar could start a rally next week off of (Friday's) U.S. data was quickly extinguished by news of U.S. tariffs against China,' Michael Woolfolk, senior currency strategist at The Bank of New York, 'The market's reaction demonstrates how sensitive an issue this is.'"

"Late in New York, the dollar was changing hands at 117.87 yen versus 117.97 late Thursday, while the euro stood at $1.3356 from $1.3335, according to EBS. The dollar was at 1.2157 Swiss francs versus 1.2175, while sterling was at $1.9673 from $1.9623 late Thursday."

"Higher inflation would stem from higher prices consumers would have to pay due to the tariffs, T.J. Marta, fixed-income strategist at RBC Capital Markets said."

"'This is not a positive development for the U.S. economy,' Marta said, particularly as higher inflation would put pressure on the Federal Reserve to refrain from accommodating any potential U.S. economic weakness due to the housing downturn."

"Dollar-selling also came Friday amid continued geopolitical tensions between the U.K. and Iran."

"The National Association of Purchasing Management-Chicago said Friday its index of manufacturing activity rose to 61.7 in March from 47.9 in February, hitting its highest level in two years and versus an expected reading of 50."

"'The stronger-than-anticipated U.S. data virtually across the board throughout the morning was not enough to get dollar-bulls out of the woodwork,' Dustin Reid, currency strategist at ABN Amro said. 'This clearly indicates that fundamentals are likely to take a back-seat,' as geo-political tensions may come to a boil next week."

From MarketWatch. "Gold futures made fresh gains Friday to close almost $6-an-ounce higher for the week as developments in Iran and China punctuated the metal's appeal as a safe-haven investment. But gold's April contract finished the month of March with a loss of more than 1%."

"Gold for April delivery closed at $663 an ounce on the New York Mercantile Exchange, pulling back a bit from an earlier high of $665 to finish $1.50 higher for the session. The contract closed $5.70 higher than last Friday's closing level, but it's down about 1.4%, or $9.50, from the end of February."

"'Save-haven status is being confirmed,' said Neal Ryan, director of economic research at Blanchard & Co. 'But don't forget the performance-asset aspect.'"

"Prices haven't passed $700 per ounce yet because of the 'gold that has been dumped on the market in the past few weeks,' he said. Looking further ahead, gold prices will 'cross $700 in weeks -- and will quickly challenge the $730 May high without the corresponding wicked correction,' Ryan said, adding that gold has the potential to 'spike up to $800 by late fall.'"

"Gold prices had fallen by $5.30 to close Thursday at $661.50 an ounce, trading down some $11 an ounce at one point during the session. 'While one hopes that the event was a one-off, it comes on the heels of the recent safe-haven disappointment that gold generated in the wake of falling global equities,' said Jon Nadler, an analyst at Kitco.com."

"Other metals prices were higher Friday. May silver rose 11 cents to close at $13.45 an ounce. It was up 1.7% for the week, but down 5.5% for the month. June palladium climbed $1.25 to close at $357.25 an ounce, down over $2 for the week, but up a few cents for the month. And April platinum added $5.70 to finish at $1,248.30 an ounce, up almost $15 for the week but down around $8 for the month."

Besides PMs, makes me wonder some more about currency diversification. Anyone care to weigh in on good foreign currency ports in a storm, considering other factors such as collateral damage and "global competitive devaluation"?

You may know I have some Swiss francs, but they have sold a lot of gold and there is zero interest. It is a carry trade currency. I am not planning on adding more SFs.

I am thinking of currencies lately, too. If the carry trade unwinds, the New Zealand kiwi will get slaughtered, but the yield is over 7%.

Of the big currencies, I have been torn between the euro and the yen. The euro pays a modest yield and the yen pays almost nothing. Plus the euro has outperformed the yen in the past year or two.

But I can't help remembering that Europe has a housing bubble and Japan is one of the few that doesn't appear to be ready to crash. And the Japanese are big savers. So in a tough economic situation, I am leaning towards the yen. I'll post more when I make up my mind.

As I've said before, the Chinese currency might seem to be a candidate, but their banking system is a joke and I can't imagine holding communist money.

Ben,Not to be cute, but our economy is quite socialist. The ruling party in the republic is either dems or reps instead of communist. Just different party names. Both have central banks that determine the rental price for money. This type of monetary policy, combined with tax policy, is a more covert means of having two central agencies do the planning for the production and distribution of goods.

If the IMF is saying the yuan needs to rise 20-30%, along with our Treasury and Congress, I'd say it is a play for 20-30% appreciation versus depreciation.

China could collapse. However, they would still need their currency to increase in relation to ours to help diminish our huge imbalance.

Where is a decent place to purchase yuan? I still think gold is better since it is much more difficult to create. However, the way dollars are created, I think those will be pretty tough to create also.